International Monetary System

It is normally concerned with the following;-

  1. Exchange rate regimes
  2. International liquidity I.e. the value and composition of reserves, the adequacy of sale results among others.
  3. The international monetary fund, its resolution, role and functions.
  4. The adjustment process i.e. how does the system facilitate with the process of copying with payment imbalances between trading nations.
  5. Currency blocks such as the economic and monetary union (EMU) in the Euro zone countries.

Exchange rate regimes (E.R.R)

The exchange rate is the value of one currency in terms of another while E.R.R refers to the mechanism, procedures and the institutional framework for returning the exchange rates at a point in time changes in them overtime, including the factors which induce the changes .

We have the following:-

  • Rigid or fixed exchange rates
  • Flexible or floating exchange rates

Fixed Quasi fixed systems

The goal is usually standard. It is the oldest system which was in the operation till world war 1(1914). The Exchange rate was determined by their respective values in terms of goals.

The Bretton wood system   

It followed the break down of the Gold standard and inspired by the difficulties experienced earlier in the 1920’s (The great economic depression or recession).

After world war II, the USA government undertook to convert the US dollars at a fixed parity of 35 dollars per ounce of gold to be enforced by the IMF acting as central bank for member countries. Other IMF members are fixed the parities of their currencies Vis a Vis. The US dollars are subject to a 1% deviation.  Any deviation exceeding( +/-1)% would be adjusted through deliberate intervention. I.e. Through purchase or sale of the US dollars through the IMF. The system lasted between 1944-1971.

Floating exchange rate system

In a float the, the exchange rate is determined by the forces of demand and supply. The demand for a currency arises from traders wishing to import goods and services from a country  of that currency and from borrowers who have borrowed in that currency and wish to liquidate their liabilities or pay interest on their borrowings. Supply of the currency arises from transactions undertaken by residents of the country who import goods and services from the rest of the world acquire foreign assets, liquidate their foreign asset liabilities or pay interest on foreign notes. No effort is made by the regulatory authorities to influence the current spot exchange rate and the future evolution of the exchange rate rather than the forces of demand and supply. Governments are unlikely to watch over their local currencies in kshs lose value at a fast rate without taking measures through the C.B.K to shore up the currency to acceptable exchange rate level.

International Monetary Fund

After its establishment at the end of world war II, it was assigned the responsibility of stabilizing the world economic order by allocating and collecting reserves (Special drawing rights). Its other role was to supervise the adjustable peg system rendering advice to member countries on their international monetary affairs promoting research in various areas in monetary economics as well as providing a forum for discussion and consultation among member nations.